Live Oak Bancshares Inc
NYSE:LOB
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Good day and thank you for standing by. Welcome to the Live Oak Bancshares Second Quarter 2022 Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today Greg Seward, Chief Risk Officer and General Counsel at Live Oak Bancshares. Please go ahead.
Thank you, and good morning everyone. Welcome to Live Oak's second quarter 2022 earnings conference call. We are webcasting live over the Internet and this call is being recorded. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.liveoakbank.com and go to today's call on our event calendar for supporting materials. Our second quarter earnings release is also available on our website.
Before we get started, I would like to caution you that we may make forward-looking statements during today's call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from our expectations are detailed in the materials accompanying this call and in our SEC filings. We do not undertake to update the forward-looking statements to reflect the impact of circumstances or events that may arise after the date of today’s call.
Information about any non-GAAP financial measures referenced, including reconciliation of those measures to GAAP measures can also be found in our SEC filings and in the presentation materials.
I will now turn the call over to Chip Mahan, our Chairman and Chief Executive Officer.
Thanks, Greg and good morning to all. Let's move to slide four to kick things off. For today's agenda, I'm going to kick things off with a few over-arching comments before repeating our normal quarterly cadence of BJ reviewing our financial performance and Huntley highlighting our operational priorities.
Let's move to slide five. Over the next few slides we will discuss our mission to extend our nationwide government guaranteed lending platform and how that effort has led to an all-time high pipeline. As always, we will discuss the quality of our loans and we will reflect on this volatile rate environment and its effect on SBA loan premiums. Clearly, the most recent correction in the capital markets has led to deterioration in the valuation of nascent fintech companies. I am proud to report that Live Oak Ventures investments have continued to thrive and grow and seem to have dodged the downturn at least for now. Huntley and BJ will have much to say about the Finxact sale to Fiserv. I am happy to learn from the Fiserv earnings call on Tuesday that the company for the second straight call puts Finxact next-gen core processing system at the center of their future strategic plans.
Let’s move to slide six. This slide highlights the organic growth in our lending business over the past 5.5 years. The bottom of this slide shows the growth in our vertical SBA lending units. In 2018 we added seven new industries, and so far this year we've added three, bringing us to 17 in total. On the lending side, we have added 10 new lenders this year that gives us a total of 30 generalists in 27 cities. This is a new point of emphasis for us. Recently we sent 700 emails to SBA lenders at 85 banks. We will approach SBA lenders and an additional 25 banks in the next two weeks. If you are an SBA lender there is a 100% chance you've heard of us. There is a reasonable chance you've heard good things. In the 700 we contact that we currently have a pipeline in various phases of 168 folks. Many are happy of their existing bank and we want to stay in touch. The point is, we have built a culture and a technology platform that is scalable in an industry the views SBA lending somewhere in between the portal out of the banking business to just a side car to their other small business initiatives. This is what we do. We want the best lenders to know that we are coming to a town near you. Lastly, our pipeline for proposal to close has increased roughly from $1.5 billion in May of 2020 to a little over $3.1 billion today. Again, an all-time high.
Slide seven. And now for some fun facts as we consistently and forever concentrate on soundness, profitability and growth in that order. In the late '80s, one of our banks and another company have started made their first SBA loan. We had to get five declination letters from other banks before we can qualify the loan. We had to prove we were the lender of last resort. Even today the SBA has -- you cannot find credit elsewhere tests. As interest rates rise and beating drums of pending recession get louder we often have to answer the question, are you at the tip of the spear at Live Oak Bank? Your customers have no capital. Are you worried? Let me answer that. No. Here are the facts. On roughly $7 billion in loans, we have $3.4 million of over 30-day past dues and just 9 bps. Moving on to worst loans, loans on non-accrual were $16.6 million or 43 bps. That said, of the $16.8 million, $8.6 million or 53% of the total we're paying as agreed. I am overwhelmingly proud of our lenders and credit folks who have chosen the right operators and entrepreneurs.
So back to slide seven. In the past 10 years we have averaged 30 bps of charge-offs, while all other SBA lenders report more than 10 times that at 4%. Almost half our loan portfolio is guaranteed at 44%, while the rest of the industry holds tight at a rounding [error] (ph) of 3%. The pricing of our loans were considerably better with the net interest margin of just shy of 4%, as you can see, while the rest of the industry was nearly 100 bps lower, just under 3%. Since inception in ‘08, we have originated $19 billion in loans, two-thirds of which were in the SBA 7(a) program and as you can see $14 billion or 74% of our $19 billion in originations were loans to small businesses.
Let’s go to slide eight. As mentioned a minute ago, the last six months in the capital markets is not been much fun. We often say around here that capital is [thin] (PH) and BJ will cover that shortly. He also likes to talk about optionality. I'd like to talk about different arrows in our quiver. This is the same slide we showed on our IPO roadshow exactly seven years ago this week. Many investors were unaware of the tiny SBA loan sales market. As you can see, the pricing has been incredibly stable in the last 22 years. Save the Great Recession, the pandemic and now. How fortuitous for us that it precisely at this point in time my friend Frank Sanchez decides to sell Finxact to Fiserv and become their Vice Chairman. We have said to you many times the $280 billion lines of code the run on is going to get swapped out in the future to a next-gen cloud native API first solutions like Finxact. The fact that he and extensively we will be partnering with a $67 billion market cap brand name is good for Live Oak Bank. Frank subsidiary will operate separately and we supplied the necessary capital to attack the broader market.
Slide nine. How wonderful for us that the Finxact $120 million pretax gain mirrors the disruption of the 7(a) premiums decline. The Finxact gain is 1.5 times what we raised in our IPO and also exceeds our secondary offering in 2017. The Finxact profit equals all of our 7(a) loan sales for the last 14 quarters and exceeds all of our 7(a) and USDA loan sales over the last eight quarters. So, what did we do or didn't do? We did not sell in what historically seems to be a down market. Bottom left of slide nine shows what we did in Q1. We sold $211 million in paper at a 110% handle generating $20 million gain on sale dollars. This quarter we could not cherry pick enough to get the 110%, but we did sell 50% of 108%, generating $4 million in pretax earnings. Had we chosen to sell $211 in paper, the best we could have done would have been a 105% handle, generating only $12 million in earnings. So let's keep the loans at roughly 4% spread and generate $7 million in recurring net interest income. We have a long runway to continue to do just this as we wait for the usually predictable 7(a) market to come back to historic numbers.
[indiscernible]. Just before I turn it over to BJ and Huntley I want to briefly mention my 14 year torturous relationship with the income statement line item servicing asset revaluation. I often wonder who are loved less, lawyers or accountants. So let me see if I got this right. Accountants tell you that your cost of service the loan 40 bps, then they tell you the average life of the loan is seven years, you need to take the remaining 60 bps of servicing over the next seven years. And the net present value of that, we take that into income. But we already got paid in cash for the loan yesterday. Then we go to the black box once a quarter and value the accumulation of all our loans added together. After we took the company public, this servicing asset rebound number over three consecutive quarters was one quarter up $5 million, the next quarter flat, down $9 million in the next quarter. We decided to sell less loans and reduce the volatility of reported earnings per share. This quarter's negative $9 million bucks or $0.16 a share is in the appendix on slide 40. Rest assured, we think the $7 million in servicing revenue we receive annually is worth far more than the $28.5 million the [indiscernible] accountants is worth.
BJ, over to you.
All right. Thanks Chip. That’s good set-up. I don't know if I'm going to be able to deliver the financials nearly as well as Chip did. But good morning, everybody. We'll start with some highlights on slide 11. Our earnings per share, as you saw, were $216, driven by both the previously announced Finxact gain and a strong net interest income and loan growth, both linked quarter and year-over-year. Our net interest margin of 3.89% held up really well in Q2 during the beginning of Fed's rate increase cycle, loan production was solid at $960 million. And as Chip mentioned, pipelines are at all-time highs. We continue to be a talent magnet adding 13 net new lenders in the quarter and our core business performance along with continued success with our Ventures investing continues to add significant tangible book value per share, resulting in 19% increase from the second quarter of last year.
As Chip mentioned though, the current environment is not without its challenges, particularly as it relates to our secondary markets for guaranteed FDA sales, which shows up in two primary ways on our income statement. First impact is on our guaranteed sales and gain on sale income. As we discussed during the first quarter call, we saw secondary market dynamic shifting rapidly, therefore we telegraphed that we would moderate sales in Q2 and we did. Our guaranteed sales in the quarter were 70% lower than Q1 with the resulting gain on sale income of around $5 million versus $20 million in the first quarter. And as Chip mentioned, it's important to understand that this income is not permanently lost. We are simply going to earn it over time in the form of net interest income, as Chip highlighted on slide nine. Because of the flexibility we have from both the Finxact gain and the ability to hold and fund high quality assets, we will continue to remain patient with secondary market activities until premiums start to normalize.
Also related to the secondary market dynamics, as Chip talked about, our servicing asset rebound is very high this quarter at $8 million, write-down versus $16 million in Q1, primarily due to the rapid decline in market premiums as though our servicing asset is a non-cash item and it’s insignificant from a balance sheet perspective at less than 4% of capital, fair value changes do flow through our income statement. So from here we expect more modest changes in that fair value for the servicing asset as premiums eventually normalize towards long-term averages.
Turning to slide 12. You'll see, adjusted PPNR was down due to that intentional reduction of guaranteed sales, despite not a strong net interest income growth of 7% linked quarter and lower expense growth of 4% linked quarter. Credit remains very healthy with provision up $3 million, up a low base. Breaking down the components of revenue on slide 13, you will see total revenue growth still up 13% year-over-year despite this quarters lower gain on sale income, driven by strong loan growth and resulting net interest income, which was up 34% year-over-year.
Balance sheet trends look good on slide 14 and 15, with 5% loan growth linked quarter and 7% before loan sales. As you can see on slide 16, net interest margin held strong in Q2 at 3.89% with the decline from Q1 largely due to higher liquidity levels. We still expect some compression as the Fed continues to raise rates rapidly and funding costs move more quickly than loan pricing. But we are very encouraged by the resiliency of our margin.
Turning to expenses, on slide 17, we had another strong hiring quarter, adding 49 net new Live Oakers, majority of which were in our lending groups to support revenue growth. In addition, we continue to attract technology talent, which made up the majority of our hiring outside the lending groups. And Huntley will talk a little bit more about both of those in a few minutes. Credit trends on slide 18 and 19 look great. As Chip discussed at the beginning of the call, having 45% of your total loan portfolio government guaranteed is both a great comfort and a great responsibility that we take very seriously. Non-accruals and past dues remain at historic lows as do net charge-offs.
On slide 19, you see just how strong our credit performance is over time, with cumulative, not annual, cumulative charge-off rates of 29 basis points on small business loans originated since 08', 18 bps and 48 bps on our specialty finance and E&I loans since 2016. On slide 20, you will see in the upper right, our capital ratios are very strong, particularly with the addition of the Finxact proceeds. Note, the green 23% bubble we call out on the graph, which is the capital plus the reserve coverage of the un-guaranteed portion of our loan portfolio far higher than other banks. This plus the $3 billion of highly liquid guaranteed loans on our books give us both balance sheet strength and flexibility few banks can match.
To recap, pipelines are strong, we continue to attract talent credit, quality is excellent, the balance sheet is profitable and growing, expense growth continues but at a more moderate pace, secondary markets remain in flux and gain on sales premiums are depressed and our Ventures investments continue to provide us with organic capital and optionality.
With that, I'll turn it over to Huntley to give more color on where we are growing and investing. HG?
Thanks, BJ. I'll pick up some highlights on page 22 and turn out to be repetitive. Again, really solid quarter, especially in light of everything going on in the markets and the macro environment. The quarter highlighted with nearly $1 billion of diversified loan origination. We just continue to find great opportunities to provide capital to small businesses. 5% linked quarter loan growth, 25% year-over-year. Equally as exciting on the deposit side, we saw a really strong growth in our business savings product with 18% linked quarter growth over $1.3 of business savings accounts. Now that product continues to resonate with our small business customers.
We also launched our first deposit vertical serving the 1031 exchange market, and already have $30 million of deposits there, excited about where that can take us and the ability to expand into other verticals as well. We've been really cautious in launching our small business checking product. As Chip mentioned, this journey with Finxact, we want to make sure that this platform is hardened and ready to take on scale. We've got 500 customers on there now and we're ready to step on the gas. Looking forward, we're excited to continue to enhance and grow that small business deposit product, launch our working capital product here in August, expand our embedded banking offering where we recently went live with our first customer and upgrade our loan origination platform. So, as always, a lot going on around the bank.
On page 23, you can see an overview of our loan origination platform. Again, great quarter of origination. And as Chip and BJ mentioned, even more encouraging is that our pipelines have returned to all-time highs after a bit of a slowdown in the first part of the year. From a mix perspective, on the right hand side of the page you'll notice a bit lower proportion of USDA lending in the quarter, which is a function of reduced bioenergy production and some funding shortfalls of the USDA. But despite our overall pretty cautious outlook on the economy, we remain really optimistic about the second half of the year and beyond. As you've heard Chip and BJ mention, we will remain vigilant in maintaining our credit quality, but small businesses are proving themselves to be unbelievably resilient and the overall themes we've highlighted of business transitions and the prudent expansion of great small business operators continues to prove themselves out.
Page 24 has some granularity of the loan portfolio and really shows the power of our diversified platform. Highlights for the quarter include many of our flagship small business industry verticals like healthcare, veterinarians and investment advisors, along with strength in our middle-market lending and the conventional side and our general SBA lending team that Chip mentioned, which continue to source attractive opportunities across the nation and across a variety of industries. We also continue to find interesting new verticals and are excited about exploring with efforts underway in RV Parks, managed service providers, law firms and pest control to name a few. As I mentioned, one area we saw muted activity within our bioenergy group where the combination of rising interest rates, supply chain delays, construction costs also met specific declines in carbon credit markets. But the tailwinds in renewable energy overall remain extraordinary, and we still see tremendous opportunity in that space for us.
Let’s flip to page 25, and a little more information, as Chip mentioned, on our SBA general lenders where we hired nine folks in the first half of the year and a couple of more in the pipeline and that momentum seems to continue. What we see is that, the platform that we've built is really paying dividends and from an investment perspective even when we hold loans on balance sheet, on the outside this is about an 18-month payback for each of these new lenders, but typically much quicker than that.
Flipping to 26, a few thoughts on the Finxact gain. On the one hand, this gain was the culmination of a bunch of hard work of our teammates and our partners to build this company to where it was and got to. It also provided a non-dilutive capital raise for us that allows us to manage our balance sheet, invest in our team, our community, in our technology. But on the other hand, we're just beginning to unlock the value this platform will provide for us and we're as excited as ever about the future. Last quarter, we shared some plans for the proceeds, employee bonus of $7.5 million, charitable donation to the foundation of $5 million and we said that our goal was to reinvest in the technology about $10 million to $15 million. We're doing that primarily through hiring where we've hired about 20 new folks in our technology team year-to-date, which accounted for almost half of our increase in the adjusted earnings quarter-over-quarter. And we plan to hire about 25 more people to complete the build out that we referenced of this technology team. When you include all these people and a little bit of professional services, that will add about $7 million to $8 million annually run rate to our expense base. And the way we look at this is that, Finxact gain allowed us to pull forward this hiring by about two years to accelerate the delivery of our roadmap.
All in all, our technology spend in the quarter was about 14% of our adjusted non-interest expense, which for a bank with up branch distribution network feels pretty reasonable. So importantly what are we building with all this technology and the platform. On the lending side we're enhancing our loan origination platform to better serve our customers, to increase our speed to close and to allow us to make smaller balance loans more efficiently. But the majority of our efforts remains focused on building primary operating relationships with small businesses to generate low-cost deposits. While our consumer and small business savings products continue to be well received we know the importance of driving down our funding cost through non-interest bearing deposits. After a long journey, our small business checking account is finally ready for the mass market. And by the end of the year, we'll have an enhanced operating account with treasury management features for our larger clients, a working capital loan product, additional deposit verticals and additional embedded banking partnerships.
And for many of you, this will be unpopular that it’s taken this long and we've been talking about this, but we remain committed to building out this technology stack the right way. And to do that has been a journey and it's taking time. We really believe that we're setting ourselves up for massive increase in velocity and to future proof this company for the next decade of technology innovation.
So, in addition to the Finxact gain, you can look at our Ventures activities on page 27. We followed on investing in Apiture and DefenseStorm along with two exciting new opportunities that we invested in, which are both great standalone investments, but also provide us opportunities in the embedded banking space. As Chip mentioned, it's not lost on us that valuations have reset in the technology market broadly and in fintech. We feel really comfortable with the strength of our portfolio. Likewise, the Canopy portfolio, which we included in the appendix on page 39 continues to perform well. And with that second fund coming online we're excited about the opportunity to invest there at more reasonable valuations.
The flip side of the fintech market reset is that, many of our challenger banks that we've been competing with lately have witnessed increase in their cost of capital, availability of capital and need to demonstrate their profitability, which has forced them to adjust their business models. For us with the rock solid balance sheet, profitable core business we can remain consistent in our mission and our technology roadmap. Four years ago we made the decision to begin to hold more loans on balance sheet, a move that insulated us from the capital market dislocations like we saw during the pandemic, and that we're seeing now. And we know that shift to hold more loans adjust the trajectory of our reported EPS, but we feel it's absolutely the right decision for us and for our shareholders. And we also know we have other elements of volatility in our earnings, as Chip mentioned, servicing assets and our technology investing. But those we accept as well in our effort to build this uniquely differentiated model and one that has and will continue to deliver exceptional returns for shareholders.
The model and the sense I gained has allowed us to generate earnings and capital to grow our business in a non-dilutive way and sets us up for continued growth and profitability. Despite these moving pieces in the quarter, our mission remains unchanged to be America's small business bank. To do that we have to continue to assemble the best folks across banking and technology who are dedicated to treating every customer like the only customer. We will leverage our next generation technology stack to create products and solutions and better serve these customers, which in turn helps drive and attract and retain and motivate our folks. And at the end of the day it all comes down to serving our small business customers and the dedication of our folks to do that.
So with that, Chip, any words or we will open up the questions.
Let's go to Q&A.
[Operator Instructions] Our first question comes from the line of Steven Alexopoulos from JP Morgan. Your line is now open.
Hey, good morning everyone.
Good morning, Steve.
Hi, Steve. I like start on the deposit side, I saw online, you guys are offering pretty wide range in terms of rates, 1.5% to 3% on CDs, 1.4% on business savings, what's the blended spot rate on new deposit dollars coming in today? And how quick could your current deposit cost reset to market rates?
Yeah. I'm happy to start the bulk of our activity is in savings and on a shorter end of the CD curve. There really is not a lot of activity, the sort of the longer duration CDs that are more in that high 2%, 3%, really there's just not a lot of activity. So you should think of the bulk of our money coming in today in that 1.4% and then some of the CDs in the high 1% sort of rate. And that's really where the bulk of our growth is coming from. In terms of the market based products that we're growing with.
And that will -- Steve, that we'll continue to increase, obviously, right? So our savings beta, as you can assume is more in the $70 million range with each move. So we'll continue to be competitive from that perspective and it will continue to go up. And on the flip side, we've got 45% of our loans variable rate quarterly adjusting, so as prime continues to go up, we will benefit from that as well. So there's a little bit of a timing issue as we manage our margin. But with the 3.89% this quarter, that held up pretty well and we're pretty encouraged by that.
Okay. So BJ, if we follow that through, previously you had talked about NIM in the 3.50%, 3.75% range. I think you pointed to the lower end, is that still -- is that guidance still intact? And I think that was by the fourth quarter.
Yeah. I think I'll stick to that. But I am more optimistic that will be towards the higher end than the lower end now that we've seen in the second quarter.
Got you. Okay. That's helpful. And then shifting to the loan side. So over the last two quarters average loans held for investment have increased about a mid-teens annualized pace, is this what we should expect as reasonable for the next few quarters?
Yeah. At least in the near term, Steve, and it's related to us intentionally holding more on the balance sheet. So even though we're holding those guaranteed loan sales, we're going to held up -- hold them, excuse me, for sale in case the market does come back and we decide to sell into the secondary markets.
Okay. And then final question. In terms of the secondary market for SBA, what's the backdrop where the secondary market should resume more normal operations? Thanks.
Yeah. So there is a couple of different dynamics going on right now, right? One is, obviously, there is very little fixed adjusting or fixed demand out in the marketplace for various reasons, because of how quickly funding costs are going up relative to yields, there are less buyers in the marketplace for fixed rate or fixed adjusting product and there are some other alternative investments that have similar terms that are more attractive right now because of secondary market dislocation, things like agencies or treasuries, et cetera. That normally don't compete very well from a yield perspective with SBA. So as that kind of washes through we think that, as Chip highlighted at the beginning, we've historically seen dislocations anywhere from two months to nine months, and we've got the balance sheet and the liquidity to wait it out. So we'll just -- we’ll that and resume our sales when appropriate and when we think we get paid for it.
Okay. Thanks for taking all my questions.
And your next question comes from the line of Crispin Love from Piper Sandler. Your line is now open.
Thank you. Good morning. And I actually have a follow-up on loan sales, kind of similar to the previous question. But the way that -- kind of thinking about it for the third quarter, and I guess if I'm looking at the second quarter loan sales, the guaranteed [indiscernible] sold as a percent of total originations was around 7%. As you're looking at the third quarter, would you think that should be somewhere in the 7% to 10% range compared to kind of recent levels like kind of historically and kind of the mid to high teens. Just -- we are just trying to get a little bit of a finer point of how you're thinking about loan sales in the third quarter.
Hey Crispin, it’s BJ. So short answer is -- again, it's hard to say, we've said a couple of different ways that we're going to be patient that we're not going to just sell into a poor market. And take a discount on paper that we think is much more valuable to carry. With that said, we're hopeful that premiums are bouncing around the bottom here. Particularly on variable rate product, fixed, it's a little bit more finicky for the reasons I just talk through. But we're optimistic that whether it's next quarter, whether it’s fourth quarter, we start to see a little bit of normalization back towards acceptable premiums, in which case, we will again get more active.
All right. Thank you. That's helpful color there. And then, just one on the pipeline. It seems like the pipeline is very strong based on your commentary during the prepared remarks on the call. I appreciate if you could just provide a little bit more detail there, like where do you see the majority of the activity coming from to drive those really strong pipelines? And then relatedly, do you still feel confident in that $4 billion plus origination target for the full year?
Sure, Crispin, it's Huntley. And I'll kick off. It's pretty broad. I would say, the small business pipelines have been pretty consistent, dipped a little in the beginning of the year and starting to see more in the way of business acquisitions, where I think when capital markets sort of earlier in the year really started to move, rates start to move, buyers and sellers had a hard time figuring out pricing and so certainly took a pause and we saw that through the first part of the year. Now we're starting to see a bit more transactions finding the mark there, so really starting to see that.
Across our specialty finance, the middle market or the lower end of the middle market companies $2 million to $8 million or $10 million of EBITDA with some institutional capital behind them. Just some really interesting opportunities there, reasonably low leverage. It feels like a space that we've got a lot of opportunity. So those are probably the areas where the pipeline is most active, but it's pretty widespread and I think the business activity still, despite all the headlines feels pretty good on our end.
In terms of the -- that $4 billion number, I think the back half of the year looks pretty solid. If we continue at this pace, we should be wrapped around that number plus or minus a little bit as for what we see -- see right now.
I'd just add to that as I'm looking at whatever slide. [indiscernible] 24 different verticals that we're in. It's very flattering to us and we published things like this on a call. It just seems that other banks show up at the verticals that we just attack. So that's all kinds of fun. That said, last week we had an all-hands meeting. So we had 700 plus people here at Wilmington, and I had the glorious time to spend with what we call our general, those 30 lenders in 27 cities. And to say that maybe some of this going on, this effect of Silverstein Army is probably accurate. Those guys and gals basically says last couple of months or the last six weeks or so, the phone seem to be ringing all of the hook. And again, those are mainly business acquisitions and their referral sources. So I agree with Huntley. I mean, I think that the second half all will be pretty good. Remember too that relative you're comparing originations year-over-year that we lost the subsidies last September. Right, BJ.
September 30.
So a lot of that growth last year through September was due to the SBA subsidy. So trying to match that year-over-year has been somewhat difficult, but we're on a row.
Great. Thank you for answering my questions.
[Operator Instructions] Your next question comes from the line of Jennifer Demba with Truist. Your line is now open.
Good morning.
Good morning, Jennifer.
Hi, Jennifer.
I can't believe it's been seven years since the IPO. Wow, time really flew. So question on expenses, Huntley, you said you're looking at $7 million, $8 million more in expenses from 25 more tech hires you are going to make this year. Can you give us a little bit more detail on where you think expenses could go in the second half of the year when you incorporate whatever lending and support hires you might make?
Yeah. And I’d say, Jennifer, just that number. There is about $600,000 in the quarter, so call it $2.5 million of run rate of that $7 million to $8 million is already in the numbers you see now. So the incremental from there is more like $4.5 million $5 million. So just to give you of the incremental technology that we're thinking. And BJ, you want to talk about sort of the broader in terms of people. I mean, really we will continue to add lenders and technology in the number who is we're talking about. But I think the head count growth will really start to flatten from here outside of that. Those are the two areas. If we find great lenders with a short payback, put them on the field. Yes, there support of that in terms of underwriting closing, et cetera, the technology squads that we're going to be hands on keyboard delivering products and features that have real returns in the market. And then I think the overall head count is going to slow down the growth outside of that pretty dramatically from here.
Yeah. And I would just add that, if you look at slide 17, it really is helpful to look at the adjusted expenses linked quarter, up 4%, but up 32% from last year. So what does that mean? It means that our expense growth trajectory is moderating. And that is in line with what we've been talking about the last couple of quarters. We said that at the end of 2021, we were playing catch up, particularly as it related to lender and lender support, underwriters, closers, servicing, in our business analyst group, et cetera, with the big step up in our production. And then we shifted a little bit more of our focus this year towards, again, lender expansion, as well as pulling up that technology investment that Huntley talked about. So we kind of went through a bubble in the second half of last year and the first half of this year. So, I do expect that our expense growth will moderate from what you've seen over the last year. And over time, we're just not investing in technology talent to invest in technology. Those investments are going to have a significant return for us over time as we build out our title operating account, our cash management and treasury management capabilities for the larger end of our customer set, for our embedded banking and the multiple partnerships that are coming online towards the end of this year and into next. So there is a lot more revenue coming behind that technology investments that we will start to see in 2023 and beyond.
Great. Question on the business checking, you said it's ready for prime time now. So can you talk about how you are marketing that product? How you incent the employees to sell it?
We've got Micah Davis, our Chief Marketing Officer here who can who can jump in and start on that one.
Yeah. Thanks for the question, Jennifer. So we are right now just starting very small. We've been primarily focused in the Carolinas and we're expanding across the country in various specific markets that coincide with where our Generals teams are and where we have strong presence in some of our verticals. Relative to our teams selling their lenders, talking about title checking, that will happen over the next, call it, six months and then we will be significantly investing in the digital marketing side to expand our presence there.
Thanks so much.
And I see no further questions at this time. I would now like to turn the conference back to Chip Mahan for closing remarks.
We thank everyone attending this quarterly call, and we look forward to seeing you in 90 days.
This concludes today's conference call. Thank you for your participation. You may now disconnect.